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EPF tax row: What is EPF and and why did Arun Jaitley’s Budget 2016 want to tax it? All you want to know

Thu March 03 2016, 7:11 am
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    1. EPF tax row: The EPF is a retirement benefit scheme that was structured to provide financial security to employees of factories and other establishments post-retirement. It is administered by the Employees’ Provident Fund Organisation (EPFO) whose highest body is the Central Board of Trustees, with representation from the government, employers and employees. While 12% of the basic salary and dearness allowance has to be contributed by all employees earning up to Rs 15,000 per month (not mandatory for others), the employer component (12%) has to be contributed mandatorily in case of all employees. The employer’s component is split into EPF (3.67%) and the Employees’ Pension Scheme (8.33%). The interest rate due on EPF is decided by the government every year. For 2015-16, the government has announced a small increase to 8.8% from 8.75% for 2014-15. (Reuters)

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    2. EPF tax row: EPF has so far been EEE, or Exempt-Exempt-Exempt EPF is categorised as EEE, which means that the investment in the EPF is tax-free at all the three stages of investing, interest accumulation, and withdrawal. The EEE status is also available to Public Provident Fund, equity linked savings schemes and life insurance policies. (Reuters)

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    The finance minister said bankers have made several suggestions with regard to amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the debts recovery tribunals (DRTs), which the department of financial services is at a very advanced stage of consideration.(Reuters)

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    4. EPF tax row: What is the government’s rationale for doing this? Announcing the imposition of tax on 60% of the withdrawal amount from EPF, the government in its Budget document argued that it was being done to bring greater parity in the tax treatment of different types of pension plans. However, in its clarification issued on Tuesday, the government said, “The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.” (Reuters)

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    5. EPF tax row: How does Budget 2016 announcement change outlook of investors? The PM Narendra Modi government has specifically said that the contributions made until March 31, 2016 will attract no tax at the time of withdrawal. It will be only applicable on contributions made on or after April 1, 2016. Since 60% of the future contributions and interest earnings on them will be taxed at the time of withdrawal, it will impact investors who plan to pull the entire corpus at the time of retirement. However, it will not impact those who plan to buy an annuity product out of the 60 per cent of the corpus (from an insurance company), for getting regular pension after retirement. (Reuters)

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    3. In real terms, India per capita income (at 2011-12 prices) during 2015-16 is estimated to have attained a level of Rs 77,435, up 6.2 per cent from Rs 72,889 for the year 2014-15. The data was released by the Ministry of Statistics and Programme Implementation.

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    7. EPF tax row: ARGUMENTS AGAINST THE TAX: 1. The first argument is that while the government is continuing with the EEE tax benefit for equity linked savings schemes by mutual funds and unit linked insurance plans where middle and large income investors invest, it is proposing to remove EEE benefit from EPF, where the majority of contributors are assumed to be in the low income bracket; 2. EPFO is the only retirement saving for workers in the low income group, and an imposition of tax at the time of withdrawal will rob them of a sizeable portion of their long-term savings; 3. Some argue that since the contribution to EPF goes from tax-paid income, if the government imposes tax at the time of withdrawal, it will be like taxing them twice on the same income; 4. A majority of low income workers withdraw their EPF money in full at the time of retirement to buy a house or for other important purposes — and restricting them by imposing tax on 60 per cent of the corpus will erect hurdles in their achieving their goal. (BY SANDEEP SINGH) (Image: Reuters)

  1. S
    shadow
    Mar 4, 2016 at 2:20 pm
    Slide feature has a low time set for the next slide. It is annoying for the slide to change every 10 secs. Please fix this. I would want to be able to move to the next slide on my own will.
    Reply

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